Limited FX exposure in Q2 yield gains
For the Q2’24 period, despite the high levels of rainfall, revenue increased by 49% y/y to ₦157.8 billion, on the back of the industry-wide hike in cement prices. Cost of sales increased by 55% y/y to ₦75.8 billion, primarily driven by a substantial 65% y/y increase in production fixed costs, the majority of which are FX-linked. Consequently, gross profit margins remained pressured for the third consecutive quarter, contracting by 2ppts to 52% compared to the previous year. This persistent margin compression can be largely attributed to the escalating costs of imported raw materials, reflecting the broader challenges of currency fluctuations. That said, gross profit increased at a slower pace by 43% y/y to ₦147.6 billion. While operating expenses increased by 29% y/y to ₦34.8 billion, EBIT margin expanded by 2ppts to 30% as growth in other income helped to offset the impact of inflation-induced elevation in operating expenses. In absolute terms, EBIT increased by 59% y/y to ₦47.7 billion. Although no FX losses were recorded in Q2’24, finance costs increased 29x to ₦12 billion with most pressure coming from letters of credit charges and other bank account operational charges. Nonetheless, PBT increased by 12% y/y to ₦37.9 billion. Supported by a slower growth in tax expenses, PAT increased by 18% y/y to ₦24.1 billion.
FX losses in Q1 pressure H1 earnings
Following the easing of the electoral pressures and other headwinds that had dominated the first half of 2023, industry-wide volumes rebounded in H1’24, supported by a broad-based increase in cement prices. That said, revenue for H1’24 came in higher by 50% y/y to ₦295.5 billion. Meanwhile, following continuous weakening in currency, increased pressure on input costs (+63% y/y: ₦96.1 billion) that are pegged to the dollar drove cost of sales higher by 57% y/y to ₦147.9 billion, with gross margin trending lower by 2ppts to 50%. While LAFARGE is keen on its transition to CNG trucks, diesel trucks still form a significant part of the distribution fleet. Also compared to last year, diesel prices have increased. Additionally, the continuous FX depreciation has also driven up the acquisition cost of trucks generally. That said, operating expenses increased by 37% y/y to ₦70.4 billion, causing EBIT margins to remain flat at 26.7%.
Cement prices to buffer rainfall impact in Q3
Although we expect weaker cement consumption in Q3’23 due to continuous rainfall, we anticipate that the higher pricing environment will remain crucial to their performance. Looking into the last quarter of the year, we expect a more stable demand, as construction activities fully commence on the back of funding initiatives by the government. Overall, we forecast revenue and PAT growth of 23% y/y and 16% y/y to ₦498.4 billion and ₦59.2 billion, respectively. We estimate a 12-month TP of ₦45.34 and place a BUY rating on the stock.
What shaped the past week?
Equities: This week, the local market traded in a bearish manner, losing- 0.46% w/w to settle at 97,745.73 ppts. Leading sectoral losses was the Consumer Goods sector (-3.33% w/w), as sell-offs in NASCON (-13.24% w/w), NB (-12.75% w/w), and NESTLE (-9.78% w/w) drove the sector lower to close the week at 1,503.01ppts. Similarly, the Banking index closed in the red (-0.48% w/w), driven by sell-side action in UBA (-4.75% w/w), FBNH (-2.38% w/w), and FCMB (-1.27% w/w). However, gains in OANDO (+24.32% w/w), ETERNA (+17.28% w/w), and TOTAL (+9.98% w/w), elevated the Oil & Gas space (+4.27% w/w). Also, the Insurance sector gained +1.59% w/w as renewed buy interest in MANSARD (+15.88% w/w) and CORNEST (+6.06% w/w) drove the sector higher.
Fixed Income: In the week, the CBN held an OMO auction where it offered ₦150 billion across the 98-day paper, 182-day paper, and 364-day paper However, at the end of the auction, zero sales were recorded across the three tenors.
The secondary market was largely bullish; however, we saw mild buy-cares in the OMO space. Similarly, bullish sentiments dominated the NTB space, as yields contracted by 15bps on average during the w/w. Finally, in the Bonds segment, muted trading activity dominated the curve, as investors remained on the sidelines in anticipation of higher yields.
Currency: At the NAFEM, the Naira depreciated by ₦0.48 w/w to close at ₦1617.08 per dollar.
Limited FX exposure in Q2 yield gains
For the Q2’24 period, despite the high levels of rainfall, revenue increased by 49% y/y to ₦157.8 billion, on the back of the industry-wide hike in cement prices. Cost of sales increased by 55% y/y to ₦75.8 billion, primarily driven by a substantial 65% y/y increase in production fixed costs, the majority of which are FX-linked. Consequently, gross profit margins remained pressured for the third consecutive quarter, contracting by 2ppts to 52% compared to the previous year. This persistent margin compression can be largely attributed to the escalating costs of imported raw materials, reflecting the broader challenges of currency fluctuations. That said, gross profit increased at a slower pace by 43% y/y to ₦147.6 billion. While operating expenses increased by 29% y/y to ₦34.8 billion, EBIT margin expanded by 2ppts to 30% as growth in other income helped to offset the impact of inflation-induced elevation in operating expenses. In absolute terms, EBIT increased by 59% y/y to ₦47.7 billion. Although no FX losses were recorded in Q2’24, finance costs increased 29x to ₦12 billion with most pressure coming from letters of credit charges and other bank account operational charges. Nonetheless, PBT increased by 12% y/y to ₦37.9 billion. Supported by a slower growth in tax expenses, PAT increased by 18% y/y to ₦24.1 billion.
FX losses in Q1 pressure H1 earnings
Following the easing of the electoral pressures and other headwinds that had dominated the first half of 2023, industry-wide volumes rebounded in H1’24, supported by a broad-based increase in cement prices. That said, revenue for H1’24 came in higher by 50% y/y to ₦295.5 billion. Meanwhile, following continuous weakening in currency, increased pressure on input costs (+63% y/y: ₦96.1 billion) that are pegged to the dollar drove cost of sales higher by 57% y/y to ₦147.9 billion, with gross margin trending lower by 2ppts to 50%. While LAFARGE is keen on its transition to CNG trucks, diesel trucks still form a significant part of the distribution fleet. Also compared to last year, diesel prices have increased. Additionally, the continuous FX depreciation has also driven up the acquisition cost of trucks generally. That said, operating expenses increased by 37% y/y to ₦70.4 billion, causing EBIT margins to remain flat at 26.7%.
Cement prices to buffer rainfall impact in Q3
Although we expect weaker cement consumption in Q3’23 due to continuous rainfall, we anticipate that the higher pricing environment will remain crucial to their performance. Looking into the last quarter of the year, we expect a more stable demand, as construction activities fully commence on the back of funding initiatives by the government. Overall, we forecast revenue and PAT growth of 23% y/y and 16% y/y to ₦498.4 billion and ₦59.2 billion, respectively. We estimate a 12-month TP of ₦45.34 and place a BUY rating on the stock.
What shaped the past week?
Equities: This week, the local market traded in a bearish manner, losing- 0.46% w/w to settle at 97,745.73 ppts. Leading sectoral losses was the Consumer Goods sector (-3.33% w/w), as sell-offs in NASCON (-13.24% w/w), NB (-12.75% w/w), and NESTLE (-9.78% w/w) drove the sector lower to close the week at 1,503.01ppts. Similarly, the Banking index closed in the red (-0.48% w/w), driven by sell-side action in UBA (-4.75% w/w), FBNH (-2.38% w/w), and FCMB (-1.27% w/w). However, gains in OANDO (+24.32% w/w), ETERNA (+17.28% w/w), and TOTAL (+9.98% w/w), elevated the Oil & Gas space (+4.27% w/w). Also, the Insurance sector gained +1.59% w/w as renewed buy interest in MANSARD (+15.88% w/w) and CORNEST (+6.06% w/w) drove the sector higher.
Fixed Income: In the week, the CBN held an OMO auction where it offered ₦150 billion across the 98-day paper, 182-day paper, and 364-day paper However, at the end of the auction, zero sales were recorded across the three tenors.
The secondary market was largely bullish; however, we saw mild buy-cares in the OMO space. Similarly, bullish sentiments dominated the NTB space, as yields contracted by 15bps on average during the w/w. Finally, in the Bonds segment, muted trading activity dominated the curve, as investors remained on the sidelines in anticipation of higher yields.
Currency: At the NAFEM, the Naira depreciated by ₦0.48 w/w to close at ₦1617.08 per dollar.
